Final Results

RNS Number : 6310I

Severfield PLC

03 June 2014

 



Severfield Plc

("Severfield" or the "Group")

Preliminary Results

For Year Ended 31 March 2014
Strong balance sheet - Good margin progression - Solid UK order book

Severfield plc, the market leading structural steel group, today announces its unaudited preliminary results for the 12 month period ended 31 March 2014.

Highlights

·      Underlying* profit before tax of £4.0m (2013: £21.5m loss)

·      UK underlying operating margin (before JVs and associates) recovery to 3.3% (2013: -6.0%)

·      Share of losses from Indian joint venture of £3.0m (2013: £0.3m loss)

·      Period end net funds position of £0.3m (31 March 2013: £41.2m net debt)

·      Further restructuring of largest business, Severfield-Watson Structures, concluded successfully

·      Operational improvement programme progressing well and continuing

·      UK order book steady at £168m at 1 May 2014 (1 November 2013: £172m)

·      India order book of £41m at 1 May 2014 (1 November 2013: £34m)

£m		12 months to 31 March 2014	15 months to 31 March 2013
Revenue		231.3	318.3
Underlying* Group operating profit/(loss) (before JVs and associates)		7.6	(19.2)
Underlying operating margin (before JVs and associates)		3.3%	(6.0%)
Operating loss (before JVs and associates)		(0.1)	(26.5)
Underlying profit/(loss) before tax		4.0	(21.5)
Loss after tax (including non-underlying items)		(2.6)	(23.1)
Underlying basic earnings per share		0.88p	(10.78p)
Dividend per share		Nil	1.5p

* Underlying is before:

·      amortisation of acquired intangible assets - £2.7m (2013: £3.4m)

·      restructuring and redundancy costs - £2.6m (2013: £0.8m)

·      retirement of acquired intangible assets  - £2.4m (2013: nil)

·      impairment of investment in associates - £0.4m (2013: nil)

·      contract legal costs and provision movements - nil (2013: £1.1m)

·      movements in valuation of derivative financial instruments - nil (2013: £0.1m favourable)

·      the associated tax impact of the above

Ian Lawson, Chief executive officer commented:

"During the financial year Severfield has achieved substantial operational improvements across the Group and delivered a significant turnaround in underlying profit before tax. Pleasingly, the Group's ongoing stabilisation and recovery generated increasing UK operating margins supported by a strong balance sheet and solid order book. While our Indian joint venture performed below expectations, actions are being taken to put the business in a sustainable position and we believe the market in India continues to present significant future growth opportunities.

The development of a clear Group strategy in addition to the anticipated recovery in the core UK market means Severfield is well placed for future growth."

For further information, please contact:

Severfield plc	Ian Lawson Chief executive officer	01845 577896
	Alan Dunsmore Finance director	01845 577896
Jefferies International Limited	Simon Hardy	020 7029 8000
	Harry Nicholas	020 7029 8000
Bell Pottinger	David Rydell	020 7861 3886
	Guy Scarborough	020 7861 3870
	Will Bland	020 7861 3139

Chief executive's review

Group overview

This year has seen stabilisation and recovery in the UK business, but disappointment in India. Underlying profit before tax of £4.0m represented a significant turnaround from the underlying loss of £21.5m in the 15 months to 31 March 2013. This reflected both a good recovery in UK operating margins but also a share of losses from our Indian joint venture of £3.0m. The rights issue launched in February 2013 was completed in April 2013, significantly strengthening the Group's balance sheet. Good working capital management during the year has resulted in a positive net funds position of £0.3m at the year-end.

I was appointed in November 2013 which enabled John Dodds to step back into his role as non-executive chairman. I have continued to drive the UK operational improvement programme which started under John's leadership. In addition, I have conducted an initial review of the Group's branding, communications and market positioning, and have now put in place the initial foundations of a more comprehensive Group strategy.

UK review

UK turnover of £231.3m compared with £318.3m in the prior 15 month period and reflected a modest reduction in capacity at our largest business. More importantly, the underlying operating profit of £7.6m represents a recovery in the UK operating margin to 3.3% which is a good step towards our previously stated target of 5-6% by 2015/16 in current market conditions.

The largest business in the Group, Severfield-Watson Structures ("SWS") was reorganised in the first half of the year. Ian Cochrane, previously managing director of our Fisher Engineering business in Northern Ireland and now Group chief operating officer, was appointed acting managing director of SWS in April 2013 and implemented this reorganisation. There were three key elements to the reorganisation; firstly, a reduction in capacity of 10% to improve the overall supply and demand dynamic in the market, secondly, a further reduction in overheads following an initial reduction in the previous period, taking the total savings made to £4m per annum, and thirdly, a reorganisation and strengthening of the management team. This business reorganisation has been completed with all the anticipated savings realised, with a one-time restructuring charge of £2.6m recorded in the first half of the year.

In parallel with this reorganisation, a comprehensive operational improvement programme was launched across the Group. The objective of this has been to improve risk assessment, operational and contract management processes within the business. This programme has made good progress in the year, which is reflected in the improved underlying operating margin, and will continue into the 2014/15 financial year. Management believes the programme will lead to underlying operating margins reaching 5-6% in 2015/16 in current market conditions.

During the year, good progress was made in resolving the main legacy contract issues which were at the core of the operating losses in the previous period. As expected there were challenges in resolving some of these issues but overall the outcome of those legacy contracts has been in line with the board's expectations coming into the year, and the board believes that balance sheet risk relating to these contracts has now been removed.

Order book and market conditions

The UK order book, at £168m, remains solid and within a range which management is comfortable with, representing approximately 8 months of forward production capacity. It has reduced in overall terms over the year from previous levels but this reflects both the capacity reduction arising from the business reorganisation, as well as a longer negotiating period on major contracts arising from our improving risk management processes. The market has been stable during the year but prices have remained competitive and we continue to focus on ensuring that there is a fair balance of risk and reward within the contracts. There are signs that the market will pick up towards the end of 2014 but the current order book does not yet reflect this.

Projects

Throughout the significant reorganisation over the past 18 months, we have continued to deliver projects to our client's expectations. Projects undertaken in the current period included:

Finsbury Square

Moorgate Exchange

5 Broadgate

Fitzroy Place

BNP Paribas

Aldgate Tower

Nova, Victoria

Glasgow Smartbridge

Microsoft Data Centre, Amsterdam

Birmingham New Street Station

Paris Philharmonic

Manchester Victoria Station

Jaguar Land Rover, Midlands

Intel Developments, Ireland

India

Performance from the Indian joint venture, JSW Severfield Structures Ltd ("JSSL"), was disappointing in the year, with the Group's share of losses totalling £3.0m, particularly as in the previous period the business had achieved close to a breakeven position. While order book levels at the start of the year were satisfactory, unexpected delays and timing variations to some of the contracts within that order book quickly led to the factory being underutilised. Pressure to fill this spare capacity led to deterioration in the project mix within the business with low and even negative margin industrial projects being secured to utilise some of the spare capacity and make a contribution towards the overheads of the business. This situation did not improve as the year progressed.

Behind this poor performance it became increasingly clear that the market for steel fabrication and commercial development of the business was not progressing as well as expected. India remains primarily a concrete construction market which presents great opportunity for steel. This potential continues to be reaffirmed in all the market research that we carry out, both formal and informal. However, converting concrete projects to steel projects continues to take longer than anticipated and efforts in this area are being stepped up.

In response to these challenges, Derek Randall, executive director, moved to India full time in August 2013. It was then agreed with our joint venture partner, JSW, to reorganise the management of the business in December, at which point Derek became managing director. An overhead reduction programme was initiated, and now completed, and a new business development and operational improvement programme is in place which is expected to generate a substantial improvement in the performance of the business in the current financial year. Ultimately the business is developing a sustainable position whilst the market continues the expected conversion from concrete to steel. Greater economic optimism following the recent election may help this development.

Business investment

UK investment was kept at relatively low levels during the year while the business was reorganised and stabilised. Total investment was £2.2m and represented low level replacement of some older plant and equipment. While the general stock of capital equipment across the business remains in good order, it is likely that the level of investment will need to increase to a more normal replenishment rate of £4-5m per annum in the future.

New equity of £3.5m was invested in the Indian joint venture during the year. This was required both to fund the ongoing losses of the business and the balance of the investment initiated in 2012 to increase the capability and capacity of the factory.

Safety

The Group's accident frequency rate (AFR) for the year was 0.57. Whilst this was only marginally worse than the level of 0.55 for the previous period, it fell short of the targets that the board had set for improvement. This performance reflected a disappointing first half of the year, followed by a marked improvement in the second half. The Group's approach towards health and safety was reviewed during the year and a number of new initiatives were implemented. It is hoped that the improving trend we have seen in the second half of the year is a result of some of these initiatives but more time is needed to confirm that this is the case and that we have a sustainable trend heading in a positive direction. The safety and welfare of all our employees is of paramount importance to the Group and in order to further strengthen and improve on our safety culture and systems a new health and safety director was appointed in April 2014.

Strategy, branding and communication

Following my appointment, we undertook a comprehensive review of the Group's branding and market positioning and feedback was gathered from major customers, management and staff. This resulted in the change of the Group's name to Severfield plc in May 2014, a simpler and less confusing naming structure for the Group's main operating businesses, and a new branding strategy to support this, elements of which are reflected in this report. It is believed that this new approach will better reflect the Group's strong market position and enable improved and clearer communication with all stakeholders in future.

This review identified a number of areas for improvement in the Group's internal and external communications strategy and this will be a key area of activity in the coming year.

A significant amount of work was also undertaken in developing a new long-term strategy for the Group. The core of this strategy revolves around the continuation of the UK operational improvement plan to ensure that we have a sustainable, profitable base for the business going forward. Beyond this, it will involve a continual drive to improve operational efficiency, investment to ensure that the Group continues to have market leading technology, greater focus on developing our people, and most importantly, providing an unrivalled quality of service to customers. The strategy will provide a platform for continued growth and we will be looking more actively for opportunities to expand the business both in the UK and in overseas markets. The UK in particular may involve looking for new market areas where the business has not operated in the past as well as growing market share in areas where the business already operates.

Vision, values and people

As part of the branding and strategy development work, the executive and senior management team articulated a vision for the Group, and its core values. The vision is 'to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards.' The core values are Safety, Integrity, Customer Focus and Commitment.

The values represent much of what the organisation lives by, even in recent challenging times. To that end, I would like to recognise the difficult times that our staff and employees have experienced recently and to thank them not only for their continued efforts on behalf of the Group, but also for the warm welcome which I have received since I was appointed.  

Summary and outlook

The Group is recovering well and has made significant progress during the year in strengthening operations and management. With a developing strategy, focussed branding and better market positioning, the Group is increasingly well placed to deliver stronger growth in the future, particularly if the core UK market starts to recover as expected.

While the Indian joint venture remains challenging, there is significant market potential. The strengthened management team, reduced cost base and greater business development focus are expected to lead to improved performance in the current year.

Financial review

Trading performance

Revenue for the year of £231.3m compared with £318.3m for the 15 month period to 31 March 2013. This represented a more stable underlying performance along with a modest reduction in capacity in our largest operating business during the year.  The underlying operating profit before results of JVs and associates was £7.6m which reflects a significant turnaround from the loss of £19.2m in the prior 15 month period. The underlying operating margin of 3.3% (2013: -6.0%) reflects the stability restored to the UK business and the resolution of legacy contracts which marks a significant progression towards the target of 5-6% for the 2015/16 financial year. The share of results of JVs and associates was a loss of £3.0m (2013: loss of £0.3m) and net finance costs were £0.6m (2013: £2.0m). Underlying profit before tax was £4.0m (2013: loss of £21.5m). The statutory loss before tax, reflecting both underlying and non-underlying items, was £4.1m (2013: loss of £28.9m).

Share of losses of JVs and associates

The Group's share of losses from its Indian joint venture was £3.0m for the year (2013: loss of £0.3m).  This reflected the impact of unused capacity and therefore under-recovered overheads in the factory, a poorer mix of work going through the factory, and losses booked on negative margin contracts secured to provide some factory throughput. The underlying issue was a high level of delays and timing variability on existing orders, coupled with a lack of good quality, higher margin work in the pipeline to fill the available capacity. Actions to improve the order book, strengthen management and reduce overheads have been taken which should lead to an improved result in the coming year.

Non-underlying items

Non-underlying items for the period were £8.1m (2013: £7.3m) and include the following:

Amortisation of acquired intangible assets - £2.7m (2013: £3.4m)

Retirement of acquired intangible asset relating to brand value of Fisher Engineering - £2.4m (2013: nil)

Restructuring and redundancy costs - £2.6m (2013: £0.8m)

Impairment of investment in associates - £0.4m (2013: nil)

During the past six months, a review has been undertaken of the Group's market position and branding. As a result of this, the Group's name has been changed to Severfield plc and the names of the Group's main operating businesses are also being changed to incorporate the Severfield name. Accordingly, the directors have concluded that there is no ongoing value in the Fisher's brand and the residual net book value has been written off.

A further restructuring of the Group's main business, Severfield-Watson Structures Limited was undertaken during the year. This resulted in a one-time restructuring charge of £2.6m which included redundancy costs of £1.8m and a provision of £0.8m for an onerous lease on a property no longer used.

In the first half of the year, Kennedy Watts Partnership Limited, an associate company in which the Group had a 25.1% shareholding, went into administration. The Group's net investment in this business of £0.4m was correspondingly impaired to nil.

Finance costs

Net finance costs in the period were £0.6m (2013: £2.0m). The reduction over the prior period reflects substantially reduced net debt levels throughout the year following the completion of the rights issue on 5 April 2013.

Taxation

The underlying tax charge of £1.4m represents an effective tax rate of 20.2% on the applicable profit (which excludes results from JVs and associates). This compares with an underlying credit of 14.4% in the prior period relating to the losses incurred in that period.

The total tax credit for the year of £1.4m reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation and retirement of intangibles in the year, and also the benefit of the reduction in UK corporation tax to 20% in the deferred tax calculation. This item is categorised as non-underlying and is included in other items. 

Earnings per share

Underlying basic earnings per share was 0.88p (2013: -10.78p). This calculation is based on the underlying profit after tax of £2.6m and 295,791,922 shares, being the weighted average number of shares in issue during the period.

Basic earnings per share, based on the statutory loss after tax is -0.89p (2013: -13.49p). There was no difference between basic and diluted earnings per share in the period (2013: no difference).

Dividend

No final dividend is being recommended. The board is committed to reinstating the payment of dividends. Depending among other things, on improved financial performance, it intends to introduce a progressive dividend policy, having regard to the Group's underlying earnings, cash flows and capital investment plans, the requirement to maintain an appropriate level of dividend cover and the then prevailing market outlook.

Balance sheet

Shareholders' funds increased from £102.4m to £143.4m in the year, following the completion of the rights issue on 5 April 2013, which raised £44.8m of new funds.

Goodwill on the balance sheet is valued at £54.7m (2013: £54.7m) and is subject to an annual impairment review under IFRS 3. No impairment existed either at 31 March 2014 or 31 March 2013.

Other intangible assets on the balance sheet are valued at £9.8m (2013: £15.1m). This represents the net book value of the intangible assets identified on the acquisition of Fisher Engineering in 2007, along with some new software assets installed during 2011 and 2012. Amortisation of £2.7m was charged in the year and the asset of £2.4m relating to the Fisher brand was retired, as a result of the rebranding of the Group and renaming of its main operating businesses.

The Group has property, plant and equipment and investment property totalling £78.0m (2013: £80.1m). Depreciation charged in the year amounted to £3.6m (2013: £5.0m). Capital expenditure in the year was £2.2m (2013: £2.7m). This included new equipment for use on our construction sites and general replacement of capital equipment as required. During the year the Group invested £3.5m (2013: £3.0m) as equity into its Indian joint venture company to finance its trading losses in the year and also the balance of its investment to expand capability and capacity.

The Group's capital expenditure in the year to 31 March 2015 is expected to return towards long-term replenishment levels of £4-5m per annum.

The Group's Atlas Ward subsidiary has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of  £12.5m at 31 March 2014 (2013: £11.8m). The increase in the deficit is as a result of an increase in the assumption made on mortality rates and a lower investment return on scheme assets, offset by contributions made by the Group during the year to reduce the deficit.

Cash flow

The Group finished the year with net funds on the balance sheet of £0.3m (2013: £41.2m net debt). The debt was repaid with the £44.8m net proceeds from the rights issue which completed on 5 April 2013. Operating cash flows for the year before working capital movements were £8.4m. Net working capital increased by £6.3m reflecting good progress in reducing outstanding balances on legacy contracts at 31 March 2013, offset by a normalisation of the trade creditor position which was somewhat stretched immediately preceding the rights issue, and the unwind of advance payments of £5.3m. The working capital position at 31 March 2014 is believed to represent a more normal position in relation to the underlying contracts which the business is now working on.

Net investment during the year was £5.0m, with £3.5m going into the Indian joint venture as additional equity and £1.5m being the net capital expenditure outflow for the year.

The Group has a £35m banking facility with Yorkshire Bank, part of National Australia Bank, and RBS, in place until November 2016. Following a recovery period after completion of the rights issue, normal debt and interest cover covenants are now operating on this facility.

Treasury

Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low risk financial management policy by insuring all significant trade debtors.

The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost-effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably.

The Group continues to have some exposure to exchange rate fluctuations, currently between sterling and the euro. In order to maintain the projected level of profit budgeted on contracts, foreign exchange contracts are taken out to convert into sterling at the expected date of receipt.

Going concern

In determining whether the Group's annual consolidated financial statements can be prepared on the going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. The following factors were considered as relevant:

·      The UK order book, which remains strong, and the pipeline of potential future orders

·      The Group's operational improvement plan which is driving stronger financial performance and is expected to continue doing so in the current competitive commercial environment

·      The committed finance facilities to the Group, including both the level of the facilities and the banking covenants attached to them

Based on the above, and having made appropriate enquiries and reviewed medium-term cash forecasts, the directors consider it reasonable to assume that the Group has adequate resources to continue for the foreseeable future and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Consolidated income statement

For the year ended 31 March 2014

	Before other items  2014 £000	Other items2 2014 £000	Total 2014 £000	Before other items  2013 £000	Other items2 2013 £000	Total 20131 £000
Revenue	231,312	-	231,312	318,256	-	318,256
Cost of sales	(217,830)	(2,017)	(219,847)	(330,945)	(1,766)	(332,711)
Gross profit/(loss)	13,482	(2,017)	11,465	(12,689)	(1,766)	(14,455)
Other operating income	541	-	541	993	-	993
Distribution costs	(2,432)	(79)	(2,511)	(2,912)	-	(2,912)
Administrative expenses	(3,970)	(5,633)	(9,603)	(4,610)	(5,664)	(10,274)
Movements in the valuation of derivative financial instruments	-	-	-	-	104	104
Operating profit/(loss) before share of results of JVs and associates	7,621	(7,729)	(108)	(19,218)	(7,326)	(26,544)
Share of results of JVs and associates	(3,038)	(353)	(3,391)	(310)	-	(310)
Operating profit/(loss)	4,583	(8,082)	(3,499)	(19,528)	(7,326)	(26,854)
Finance income	7	-	7	10	-	10
Finance expense	(565)	-	(565)	(2,014)	-	(2,014)
Profit/(loss) before tax	4,025	(8,082)	(4,057)	(21,532)	(7,326)	(28,858)
Tax	(1,427)	2,844	1,417	3,057	2,674	5,731
Profit/(loss) for the period attributable to the equity holders of the parent	2,598	(5,238)	(2,640)	(18,475)	(4,652)	(23,127)
Earnings per share3:
Basic	0.88p	(1.77p)	(0.89p)	(10.78p)	(2.71p)	(13.49p)
Diluted	0.88p	(1.77p)	(0.89p)	(10.78p)	(2.71p)	(13.49p)

All of the above activities relate to continuing operations.

¹      The comparative information represents the 15 month period ended 31 March 2013.

²      Further details of other items are disclosed in note 3.

³      Earnings per share for the period ended 31 March 2013 has been restated to take account of the impact of the discount element of the rights issue which completed in April 2013 (see note 6).

Consolidated statement of comprehensive income

For the year ended 31 March 2014

	Year ended 31 March 2014 £000	Period ended 31 March 2013 £000
Actuarial loss on defined benefit pension scheme*	(1,261)	(2,824)
Tax relating to components of other comprehensive income*	(101)	458
Other comprehensive income for the period	(1,362)	(2,366)
Loss for the period from continuing operations	(2,640)	(23,127)
Total comprehensive income for the period attributable to equity shareholders	(4,002)	(25,493)

* These items will not be subsequently reclassified to the consolidated income statement.

Consolidated statement of changes in equity

For the year ended 31 March 2014

	Share      capital         £000	Share premium         £000	Other   reserves         £000	Retained   earnings          £000	Total       equity          £000
At 1 April 2013	2,231	46,152	527	53,491	102,401
Loss for the year (attributable to equity holders of the parent)	-	-	-	(2,640)	(2,640)
Proceeds from shares issued	5,206	39,550	-	-	44,756
Equity settled shared-based payments	-	-	243	-	243
Actuarial loss on defined benefit pension scheme	-	-	-	(1,261)	(1,261)
Deferred income taxes on defined benefit pension scheme	-	-	-	(101)	(101)
At 31 March 2014	7,437	85,702	770	49,489	143,398

The movements in share capital and share premium reflect the 7:3 rights issue of 208,252,511 new ordinary shares at 23p per share which was approved by shareholders on 18 March 2013.  The rights issue completed on 5 April 2013, with the Group receiving net proceeds of £44,756,000 consisting of gross proceeds of £47,898,000 offset by transaction costs of £3,142,000.

	Share       capital         £000	Share    premium         £000	Other    reserves         £000	Retained    earnings          £000	Total        equity          £000
At 1 January 2012	2,231	46,152	469	83,446	132,298
Loss for the period (attributable to equity holders of the parent)	-	-	-	(23,127)	(23,127)
Dividends paid	-	-	-	(4,462)	(4,462)
Equity settled shared-based payments	-	-	58	-	58
Actuarial loss on defined benefit pension scheme	-	-	-	(2,824)	(2,824)
Deferred income taxes on defined benefit pension scheme	-	-	-	458	458
At 31 March 2013	2,231	46,152	527	53,491	102,401

 

Consolidated balance sheet

As at 31 March 2014

	2014                          £000	2013                          £000
ASSETS
Non-current assets
Goodwill	54,712	54,712
Other intangible assets	9,845	15,100
Property, plant and equipment	74,128	76,141
Investment property	3,870	3,910
Interests in JVs and associates	3,315	3,168
Deferred tax asset	1,780	1,840
	147,650	154,871
Current assets
Inventories	5,842	8,214
Trade and other receivables	60,801	71,599
Cash and cash equivalents	5,525	671
	72,168	80,484
Total assets	219,818	235,355
LIABILITIES
Current liabilities
Trade and other payables	(51,322)	(70,894)
Financial liabilities - borrowings	(5,000)	(41,461)
Financial liabilities - finance leases	(181)	(194)
Current tax liabilities	(1,422)	5
	(57,925)	(112,544)
Non-current liabilities
Retirement benefit obligations	(12,533)	(11,811)
Financial liabilities - finance leases	(25)	(206)
Deferred tax liabilities	(5,937)	(8,393)
	(18,495)	(20,410)
Total liabilities	(76,420)	(132,954)
NET ASSETS	143,398	102,401
EQUITY
Share capital	7,437	2,231
Share premium	85,702	46,152
Other reserves	770	527
Retained earnings	49,489	53,491
TOTAL EQUITY	143,398	102,401

Consolidated cash flow

For the year ended 31 March 2014

	Year ended         31 March 2014                          £000	Period ended           31 March 2013                          £000
Net cash flow generated from operating activities	2,522	804
Cash flows from investing activities
Interest received	7	10
Proceeds on disposal of property, plant and equipment	746	1,343
Purchases of property, plant and equipment	(2,218)	(2,311)
Purchases of intangible fixed assets	-	(402)
Investment in JVs and associates	(3,538)	(3,031)
Net cash used in investing activities	(5,003)	(4,391)
Cash flows from financing activities
Interest paid	(766)	(1,687)
Dividends paid	-	(4,462)
New finance leases	-	275
Repayment of obligations under finance leases	(194)	(230)
New borrowings	5,000	8,098
Repayment of borrowings	(41,461)	-
Proceeds from shares issued	44,756	-
Net cash generated from financing activities	7,335	1,994
Net increase/(decrease) in cash and cash equivalents	4,854	(1,593)
Cash and cash equivalents at beginning of period	671	2,264
Cash and cash equivalents at end of period	5,525	671

1)         Basis of preparation

While the financial information in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this preliminary announcement does not constitute the full financial statements prepared in accordance with International Financial Reporting Standards or within the meaning of section 435 of the Companies Act 2006.

The financial information set out in the announcement does not constitute the Company's statutory accounts for the year ended 31 March 2014 or the period ended 31 March 2013. The financial information for the period ended 31 March 2013 is derived from the statutory accounts for that period which have been delivered to the Registrar of Companies. The auditor reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation.

The audit of the statutory accounts for the year ended 31 March 2014 is not yet complete. These financial statements will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting.

2)         Revenue and segmental analysis

Revenue, profit before tax and net assets, in both periods, all relate to the design, fabrication, and construction of structural steelwork and related activities. All of the Group's subsidiary businesses have similar products and services, production processes, types of customer, methods of distribution, regulatory environments and economic characteristics.

Revenue, which relates wholly to construction contracts and related assets in both periods, originated from the United Kingdom.

3)         Other items

	2014 £000	2013 £000
Amortisation of acquired intangible assets	2,748	3,435
Restructuring and redundancy costs	2,611	767
Retirement of acquired intangible asset	2,370	-
Impairment of investment in associates	353	-
Refinancing related transaction costs	-	2,139
Contract legal costs and provision movements	-	1,089
Valuation of derivative financial instruments	-	(104)
Other items before tax	8,082	7,326
Tax on other items	(2,844)	(2,674)
Other items after tax	5,238	4,652

Other items have been separately identified to provide a better indication of the Group's underlying business performance. They are not considered to be 'business as usual' items and have a varying impact on different businesses and reporting periods. They have been separately identified as a result of their magnitude, incidence or unpredictable nature. These items are presented as a separate column within their consolidated income statement category. Their separate identification results in a calculation of an underlying profit measure in the same way as it is presented and reviewed by management.

Restructuring and redundancy costs have arisen on the reorganisation of the Group's largest businesses (Severfield-Rowen Structures and Watson Steel Structures) which commenced trading as a single entity, Severfield-Watson Structures, from January 2013. A comprehensive review since then resulted in changes to the senior operating management structure. In May 2013, a further reorganisation of Severfield-Watson Structures was announced, resulting in the reduction in factory capacity by approximately ten per cent and a reduction in headcount of 84 people.

The retirement of the acquired intangible asset for the Fisher Engineering brand has arisen following the recent rebranding exercise undertaken by the Group.

Refinancing related transaction costs in the prior year consist of all costs associated with the amendment of the Group's banking facilities, including the write-off of all costs relating to the November 2011 refinancing.

4)         Taxation

The taxation credit comprises:

	2014                    £000	2013 £000
Current tax
UK corporation tax	1,025	(1,429)
Adjustments to prior years' tax provision	(7)	(135)
	1,018	(1,564)
Deferred tax
Current year credit	(1,319)	(3,299)
Impact of reduction in future years' tax rates	(1,066)	(886)
Adjustments to prior years' tax provision	(50)	18
	(2,435)	(4,167)
Total tax credit	(1,417)	(5,731)

5)         Dividends

	2014 £000	2013 £000
2011 final dividend (3.5p per share)	-	3,123
2013 interim dividend (1.5p per share)	-	1,339
2013 final dividend (nil per share)	-	-
2014 interim dividend (nil per share)	-	-
Dividends paid	-	4,462

The directors have not proposed a final dividend for the year ended 31 March 2014.

6)         Earnings per share

Earnings per share is calculated as follows:

	2014                    £000	2013                    £000
Earnings for the purposes of basic earnings per share being net loss attributable to equity holders of the parent company	(2,640)	(23,127)
Earnings for the purposes of underlying basic earnings per share being underlying net profit/(loss) attributable to equity holders of the parent company	2,598	(18,475)
Number of shares	Number	Number*
Weighted average number of ordinary shares for the purposes of basic earnings per share	295,791,922	171,455,780
Weighted average number of ordinary shares for the purposes of diluted earnings per share	295,791,922	171,455,780

On completion of the rights issue on 5 April 2013 the number of ordinary shares in issue increased from 89,251,076 to 297,503,587.

In accordance with IAS 33, Earnings per Share, the Group has treated the discount element to the open offer part of the increase in share capital as if it were a bonus issue. The effect is to increase the weighted average number of shares for the reported prior period with a resulting reduction in the basic and diluted earnings per share for the period ended 31 March 2013. The adjustment is based on the relationship between the last day cum rights issue share price (73p) and the theoretical ex-rights price (38p) giving a factor of 1.92105.

Basic earnings per share	(0.89p)	(13.49p)*
Underlying basic earnings per share	0.88p	(10.78p)*
Diluted earnings per share	(0.89p)	(13.49p)*
Underlying diluted earnings per share	0.88p	(10.78p)*

* As restated

7)         Reconciliation of operating loss to cash generated from operations

	2014                          £000	2013                          £000
Operating loss from continuing operations	(3,499)	(26,854)
Adjustments:
Depreciation of property, plant and equipment	3,581	4,930
Depreciation of investment property	40	50
Gain on disposal of property, plant and equipment	(96)	(507)
Amortisation of intangible assets	2,885	3,528
Retirement of acquired intangible asset	2,370	-
Movements in pension scheme	(539)	(565)
Share of results of JVs and associates	3,391	310
Share-based payments	243	58
Movement in valuation of derivatives	-	(104)
Operating cash flows before movements in working capital	8,376	(19,154)
Decrease in inventories	2,372	871
Decrease in receivables	10,798	17,562
(Decrease)/increase in payables	(19,433)	4,448
Decrease in provisions	-	(600)
Cash generated from operations	2,113	3,127
Tax received/(paid)	409	(2,323)
Net cash flow from operating activities	2,522	804

8)         Net funds

The Group's net funds/(debt) is as follows.

	At                   31 March                          2014                          £000	At 31 March 2013 £000
Cash and cash equivalents	5,525	671
Financial liabilities - borrowings	(5,000)	(41,461)
Financial liabilities - finance leases	(206)	(400)
Net funds/(debt)	319	(41,190)

The Group has access to a revolving credit facility of £35,000,000 which expires in November 2016.

Principal risk and uncertainties

The Group's ongoing operations and growth plans are subject to a number of different risks and uncertainties. Risk management processes are put in place to assess, manage and control these on an ongoing basis. The principal risks facing the business are set out below, and are listed in no particular order.
RISK / EXPLANATION	DESCRIPTION / IMPACT	MITIGATION
Commercial and market environment The UK construction market, although showing some signs of recovery, remains impacted by the continued and residual effects of the global economic downturn, placing significant pressure on all parts of the supply chain, from end customers through to material suppliers and subcontractors. Through our different businesses we seek to win profitable work through successful tender processes. This success depends on our ability to identify, price and execute appropriate contracts to maintain a profitable order book.	Challenging trading conditions and lack of growth Uncertain demand resulting in increased competition, tighter margins and the transfer of commercial, technical and financial risk down the supply chain, through more demanding contract terms and longer payment cycles. A significant fall in construction activity could impact revenues, profits and the ability to recover overheads resulting in the need for further restructuring. Cash generation could also be impacted resulting in breaches of banking facilities.	Reorganisation of business and strengthening of senior management to improve process and discipline around contract risk assessment, engagement and execution. Close engagement with both customers and suppliers and monitoring of payment cycles. Ongoing assessment of financial solvency and strength of counterparties throughout the life of contracts. Continuing use of credit insurance to minimise impact of customer failure.
	Inadequate contract pricing and cost management Failure to accurately estimate and evaluate the contract risks, costs to complete, contract duration and the impact of price increases could result in a contract being mispriced. Failure to achieve targeted profitability of contracts resulting in a reduction in Group margins.	Business planning identifies the markets and clients that the Group will target. Estimating processes are in place with approvals by appropriate levels of management. Tender settlement processes are in place to give senior management regular visibility of major tenders. Established system of monthly reviews to measure and report contract progress and estimated outturns, including contract variations. Use of delegated authorities to ensure appropriate contract tendering and acceptance.
	Failure to mitigate onerous contract terms Failure to appropriately assess the contractual terms or the acceptance of a contract with unfavourable terms could result in poor contract delivery, poor understanding of contract risks and legal disputes. Loss of profitability on contracts as costs incurred may not be recovered and potential reputational damage.	Contract acceptance procedures are in place including legal and commercial review of terms by the new Group legal director. Work performed under standard terms and conditions as appropriate. Plans for specific types of work are agreed in advance by individual businesses allowing management to decline work where the contract terms or pricing are not considered economic. Use of delegated authorities to ensure appropriate contract tendering and acceptance.
	Reliance on key suppliers Failure of a key supplier would result in disruption to the Group's operations and the increased cost of finding a suitable replacement. Loss of profitability through increased costs and potential reputational damage as a result of project delays.	Strong relationships maintained with key suppliers including a programme of regular meetings and reviews. The Group has no single sourcing agreements in place. Contingency plans developed to address supplier and subcontractor failure. Contracts only entered into with suppliers and subcontractors after review at the appropriate level of delegated authority.
People The Group has established a market leading position over many years due in large part to the experience and skills of its key people.	Recruitment and retention of talented people As the market starts to recover, it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors. Loss of key people could adversely impact the Group's existing market position and reputation. Insufficient growth and development of its people and skillsets could restrict its growth ambitions both in the UK and overseas.	An improved talent review process is planned for 2014/15. Progression and succession planning schemes will be rolled out at each business to ensure immediate and future replacements are identified and developed. Remuneration policy is regularly reviewed to ensure that it is competitive and strikes the appropriate balance between short and long-term rewards and incentives. Skills gaps are continually identified and actions put in place to bridge these by training, development or external recruitment.
Interruption to fabrication facilities The Group's production facilities are at the core of its business and the Group relies on their smooth continued operation.	Inadequate business continuity planning Every business faces the potential risk of its operations being impacted by disruption due to loss of supply, industrial disputes, failure with technology, unplanned outages and physical damage as a result of fire or other such event. Interruption could impact both the Group's performance on existing contracts and its ability to bid for future contracts, thereby impacting its financial performance.	The Group has four main production facilities so interruption at one facility could to some extent be absorbed by increasing capacity at a sister facility. Detailed maintenance programmes are in place at each of the Group's facilities. A wide network of subcontract fabricators is used on a recurring basis, both for short-term peak capacity requirements and for more specialised fabrication. This network could also be used to mitigate disruption to the Group's own fabrication facilities. Appropriate levels of business interruption insurance cover are maintained and reviewed regularly with the assistance of independent advisers and brokers.
Indian joint venture The Group has invested in a joint venture in India, where the growth prospects are believed to be substantial.	Performance of the joint venture The growth, management and performance of the business is a key element of the Group's overall performance. Effective management of the joint venture is therefore important to the Group's continuing success. Failure to identify, understand and evaluate the risks of operating in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations.	Robust joint venture agreement. Two members of the Group's board of directors are members of the joint venture board. Strong governance in place at the joint venture. Regular formal and informal meetings held with both joint venture management and joint venture partners. Joint venture was refinanced in late 2013 and the management structure was strengthened during the year. Contract risk assessment, engagement and execution process now embedded.
Health and safety The construction industry sets very high standards of health and safety which the Group aims to exceed to maintain the health and well-being of its employees.	Serious health and safety incident Construction activities can result in injury or death to employees, leading to the potential for legal proceedings, regulatory intervention, project delays and, where at fault, potential loss of reputation. Loss of profitability and ultimately exclusion from future business.	Established safety systems, sites visits, monitoring and reporting, and detailed health and safety policies and procedures, are in place across the Group under the leadership of the new Group SHE director. Thorough and regular employee training programmes. Director led safety leadership teams established to bring innovative solutions and to engage with all stakeholders to deliver continuous improvement in standards across the business and wider industry. Priority board review of ongoing performance. Regular reporting of and investigation and root cause analysis of accidents and near misses. Achievement of challenging health and safety performance targets is a key element of management remuneration.
Information technology (IT) The Group's complex and interdependent IT systems support the effective and efficient running of the business. Ensuring our systems are reliable strengthens the day-to-day operations of the Group.	IT failure or disruption With insufficient IT disaster recovery planning, cyber-attack or property damage could lead to IT disruption with resultant loss of data, loss of system functionality and business interruption. Prolonged or major failure of IT systems could pose significant risk to the ability of the Group to operate and trade, thereby impacting its financial performance.	IT is the responsibility of a central function which manages the majority of the systems across the Group. Other IT systems are managed locally by experienced IT personnel. Significant investments in IT systems are subject to board approval. Data protection and information security policies are in place across the Group including, anti-virus software, off-site and on-site back-ups, storage area networks, software maintenance agreements and virtualisation of the IT environment. Cyber-crimes and associated IT risks are assessed on a continual basis.

 

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